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China’s Economic Downturn.

In Money Supply on March 18, 2011 by CQCA

China has been seen by many as the last major driver of economic growth in the Great Recession.  One U.S. Dollar invested in China’s GDP in the year 2000 would be worth $2.44 in 2009.   One U.S. Dollar invested in the E.U. 27’s GDP over the same time period would only be worth $1.22. [1]

The People’s Bank of China is estimating 2010 GDP growth at over 10%. [2] Foreign Policy magazine, a publication known as “an essential modern guide to global politics, economics, and ideas for people who want to know what’s really happening in an increasingly complicated world,” goes so far as to predict China’s GDP in 2040 will be $123 trillion. [3]

Exports are China’s leading source of real economic growth.  In 2008, after the start of the Great Recession, 82 million TEU shipping containers passed through China’s top five ports. [4]

However, the major source of artificial stimulus is China’s monetary inflation.  In 2000, China’s GDP was 9.9 trillion Renminbi, unadjusted.  In 2009, it was 34 trillion Renminbi, unadjusted.  In nominal Renminbi, this is an increase of 243%. [5]

By comparison, the money supply of Renminbi has increased from 13 trillion RMB in 2000 to 61 trillion RMB in 2009. [6] This is an increase of 369%.  Below is a graph comparing China’s money supply, GDP, and population growth during this time.  It should be noted that (1) the money supply increased by over 25% in 2009, alone, and (2) the money supply has increased more than GDP growth for seven of the ten years between 2000 and 2009.

 

China’s GDP has grown slower than the money supply, which means—in real terms—China has been in an economic downturn for the past decade.  There are various schools of thought with different beliefs regarding the money supply.  The three main schools have been summarized below.

I tend to lean towards the Austrian School.  The Keynesians are incorrect to say that more money slips creates more wealth, just as more ration slips do not create more rice.  The Monetarist School is relatively naive to believe the government can accurately calculate the total wealth in a society, and what ratio should exist between an economy’s assets and money supply.  The Austrian School believes that money backed by a commodity, usually gold or silver, will be revalued up or down depending on supply and demand in the marketplace.

[1] OECD data on GDP growth.

[2] Mu, Xuequan. “China’s 2010 GDP Growth Likely to Reach 10 pct, Says Central Bank Chief.” Xinhua. January 4, 2010.

[3] Fogel, Robert. “Why China’s Economy Will Grow to $123 Trillion by 2040.” Foreign Policy. January, 2010.

[4] APAA data on 2008 port traffic.

[5] OECD data on China’s (output approach) GDP.

[6] People’s Bank of China data on M2.

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